The leader of Europe's Socialist MEPs has hailed a victory over the UK in the battle for new laws capping bankers' bonuses.

The UK Government was defeated in the last round of talks in Brussels on Wednesday night when final negotiations between the European Parliament and the Irish government, representing all member states as holder of the EU presidency, confirmed that limits on bonuses will come into law across Europe from the start of next year.

Socialist group leader in the European Parliament Hannes Swoboda said: "The European Parliament has resisted pressure from the British Government and has not accepted more changes to caps on bonuses.

"Despite fierce resistance from national capitals and the financial industry, Europe will be fairer in 2014. Starting in 2014, bankers' bonuses will be capped at a maximum of twice their base salaries. We believe that a cap on bankers' bonuses will help end the culture of irresponsible risk-taking in the banking sector that led us to the collapse of Lehman Brothers in 2008."

The controversial plan comes into force as part of a range of new financial regulations in response to the economic crisis.

Chancellor George Osborne had warned that the move would drive banking business away from the EU and, crucially for the UK, away from the City of London as the EU's leading financial capital. But at talks three weeks ago he failed to get enough support to remove the issue of bonus caps from a wider scheme forcing banks to increase liquidity and set aside more money to give extra help to small businesses.

The new bonus rules, added late to a "Capital Requirements Directive", restricts bonuses to a year's salary or a maximum of two years if shareholders approve. With the law in force from the start of 2014, it will not apply to this year's bonuses.

Liberal Democrat MEP Sharon Bowles, who chairs the European Parliament's Economic and Monetary Affairs Committee, approved the move as an important culture change.

She said: "A cap on bankers' bonuses is not a punishment for bankers but a realignment of the work/reward ratio. Anyone receiving their annual salary, or twice their annual salary, as an additional bonus should not complain they are not sufficiently rewarded for their work.

"The mass exodus from the City of London by disgruntled bankers demanding the astronomical bonuses of yesterday remains to be seen and I am sure fair-mindedness will prevail. The agreement will usher in a much-needed culture change, not just for the City of London, but for the rest of Europe too."